A Budget for Discounts?

The following is from the December 2008 Drilling Down Newsletter

Got a question about Customer Measurement, Management, Valuation, Retention, Loyalty, Defection?  Go ahead and send it to me here.  If on the topic below, please leave a comment.

A Budget for Discounts?

Q:  For the first time ever, we have a Discount budget built into our financial plan.  We’ve been told this number in the budget is less than we used last year, but our Sales target is a bit higher.  We’re supposed to hit our sales targets while at the same time not going over budget with our Discounts to generate those sales.  This directive comes from Finance.

A:  You have just been offered the opportunity to graduate from Advertising to Marketing!

Q:  We are fairly sure if we reduce the discounts we give, response is going to fall and so are sales, especially from best customers.  Or we could keep the same discounts but do fewer discount promotions, with probably the same effect on sales.  Are there any other alternatives, any ideas on how to manage this discount budget issue? 

We’re an online only retailer.

A:  Sure, ask an easy one over the holidays!

Seriously, I hope you did not take my comment about graduating from Advertising to Marketing the wrong way.  This is really an opportunity for you to shine in so many ways, and to learn a lot of new ideas in the process – if you want to take advantage of it.

The question at hand here is really this: How do I maximize the Sales Dollars I get from each Discount Dollar I spend?  In other words, How do I improve Discount Productivity?

You’ve been given a more global directive that opens the door for a Strategic role.  Rather than just pumping out ads, you could now accept Corporate responsibility – Profits.

You can take advantage of this opportunity for more responsibility (and compensation down the road?) by:

1.  Using this issue as an opportunity to build a strong bond with Finance, which has a lot of benefits now, and in the future

2.  Prove that you can take on a more global challenge like this, and win for the company, not just your area

Let’s talk through the idea of a discount budget for a moment.  Why would Finance want to have a discount budget?  Probably, they want to boost Gross Margin, the amount of a Sale that goes towards paying the bills.  Why do they need to do this?  Well, a good deal of the increases in online commerce profits in the past have come from organic growth, the natural growth of online as a function of more people being online and the increased usability of web sites.

Now, in what is probably a flat Sales environment, if you want to increase Profits, you cannot rely on organic growth anymore.  So you have to figure out how to cut costs, and in commerce, one way to do this is to reduce the amount of discounting going on.

Now, here is where it gets tricky.  There are generally two kinds of discounting that occur in most commerce businesses:

1.  Discounts / Coupons – usually customer level in nature, driven by Marketing, used to increase sales volume

2.  Markdowns – usually product level in nature, driven by Merchandising, to make room for new products in inventory budget

Now, you can certainly implement a single campaign that hopes to accomplish both goals, but that’s not the point.  The point is, as a Marketer, and concerned with customers, you would not always choose to do the same kind of discounting that a Merchant would.  

For example, a focus on promoting “dog” product that people don’t want to buy at most any price.  Your Objective as a Marketer is different than the Merchant, you care about customer experience and satisfaction, right?  Not about moving dog product out the door?

And this issue of the difference in Objectives for discounting  is what swings open the door for a talk with the good folks in Finance.  If you’re a junior person, it opens the door for your boss.  If you’re a Marketing analyst, it opens the door for a most exciting project.

What is this little talk with Finance about?

1.  What is the real reason for this discount budget, what is the end or target metric Finance is trying to hit?

2.  Is this budget for Discounts to customers only and not Markdowns on products, which (often) is a Merchandising decision?

The first question drives to clarity of Objective, the second to the issue of potentially being Accountable for something you are not Responsible for, that you don’t Control.

Discounts can drive Sales, they can drive Margin Dollars, they can drive New Customers, depending on how they are targeted.  You can’t normally do all three at the same time.  So the first thing you want to talk with Finance about is the true Objective of this discount budget.

“Look folks, what is the bogie we are trying to hit here?  I’m all in for the idea of a Discount budget, but hey, let us help you accomplish your Financial goal for the Company.  What is the number we’re trying to improve with this Discount budget?  Let’s talk about how to get there”.

I suspect they are looking at Gross Margin Dollars, but it could be any number of things, depending on the business model.  The point is to clarify what metric it is they are looking at and then to make sure you know what goes into it so you know what role you play.

Which brings us to point number 2: if they’re talking about Gross Margin Dollars, that’s a number that probably includes the Markdowns from the Merchant side, as well as (probably) other charges.  Now you’re up to at least two inputs you, as the Marketer, don’t control on your side of the equation.

“OK, Gross Margin Dollars it is, we agree on a target and we’ll use the Discount budget as a rule of thumb on getting there.  But here’s the thing I want to be clear on, how do you get to a Gross Margin Dollar from a Sales dollar?  Because we’re responsible for Sales and Discounts, but I’m not sure we’re responsible for some of the other variables that go into Gross Margin Dollars.  So I just want to make sure we’re talking apples to apples here.”

Let’s say that Finance knows what they’re doing and have created a Discount budget for you that only has Customer Discounts in it.  This means the Gross Margin Dollars target is a shared one; both Marketing and Merchandising have a horse in the race for this Objective.

Which brings up the question of Allocation – since the final Finance target is shared with at least Merchandising, how did Finance decide how much to allocate to Marketing / Customer discounts and how much to allocate to Merchandising / Product Discounts?

Because that’s the discussion you (or your boss) should have been in on.  This is the very heart of the matter, the difference between being in Advertising versus Marketing.  It’s a seat at the table when this kind of discussion goes down.  I’d bet the head Merchant was in on this discussion – if there was a discussion.

“Listen, I wonder if I could ask you something.  With this Discount budget, it’s going to be tough to drive sales volume like we did last year.  You know that, right?  At the same time, we sell lines that the Merchants are always Marking down to get rid of.”

“It seems like a waste of the Company’s time and effort to promote those products.  Besides, the same lines have high Return Rates and this harms the Customer Experience with our Company.  If we stopped selling these lines, wouldn’t Gross Margin Dollars increase?  Then we could use some of that increase to make sure we hit Sales targets with promotional Discounts to Customers, which we know they like.”

“What do you think of that idea?  Could we do some analysis on Markdowns and maybe fine-tune this Customer Discount budget by getting the Merchants to commit to reducing their Markdown budget?”

When you know:

1.  What this Discount budget is exactly, what the end target Finance has in mind really is and what role you play in getting there

2.  That you are really responsible for and in control of the Dollars this budget represents, and the outside influence on this budget is minimal

3.  All efforts have been exhausted outside Marketing to bring other players to the table and contribute to attacking this GM$ issue

Then you are ready to work on maximizing the Productivity of each Discount dollar you have.

The good news is this: It is possible to increase the Productivity of each Discount Dollar.  A method and detailed example of how to test through the Optimized Allocation of Discounts is provided here

The unfortunate news is this: you’ll have to get really good at allocating these Discount Dollars if you want to both increase Gross Margin Dollars and Increase Topline Sales.

Welcome to Marketing, where it’s not just about your Sales and Campaigns, it’s also about the larger Financial picture.  This often means hunting down problems in other parts of the Company that negatively impact your ability to Optimize Advertising Programs.

Jim

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What do you think about this scenario?  Is it possible at your company to have a discussion like this with Finance?  To create a sense of shared responsibility for larger Company goals?

Or is more like “every silo for itself”?

Have a question on Customer Valuation, Retention, Loyalty, or Defection?  Go ahead and send it to me here.  If on the topic above, please leave a comment.

 

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